Car Journal: How Long Can India’s Diesel Boom Run?

The recently launched Volkswagen Jetta, is powered by a 2-liter common-rail diesel engine. These engines use a high-pressure direct injection fuel system which makes them more powerful, responsive and fuel-efficient than other car engines.

Indian car buyers love diesel cars.

The reason is quite simple. The cost of diesel fuel is about 40% lower than petrol. In addition, diesel cars are also about 30% more fuel-efficient; due to the way diesel engines burn fuel. This one-two punch means that on average diesels are up to 70% cheaper to run compared to petrol models. Perfect for an Indian family on a tight budget.

Savvy Indian car buyers don’t mind paying the 80,000 to 100,000 rupee premium on diesel models since that can easily be recovered in lower running costs. Based on an average use of 15,000 kilometers per year, a diesel model recovers its higher cost in about 3.5 years. Also the resale values of diesel cars is growing, with most models seeing a 5% to 7% increase in the past several months.

But how long can this diesel boom run? Even though carmakers remain optimistic about the market for diesel cars – and new launches happen practically every few weeks — there are some warning signs on the horizon that, if the worst happens, could mess up the market substantially.

These factors are hard to see, perhaps, amid the frenzy of new diesel car launches. Indeed, some makers only offer diesel models, such as the recently launched new generation Volkswagen Jetta, which is powered by a 2-liter common-rail diesel engine. These engines use a high-pressure direct injection fuel system which makes them more powerful, responsive and fuel-efficient than engines in the past.

Given the current trend, car manufacturers and other industry watchers are confident that the share of diesel vehicles will rise to at least 40% of the Indian passenger car market by 2016 from an estimated 35% now.

The sub-compact car segment is the major driver of demand. This segment contributes to over 50% of total passenger car sales in India. It includes models like the Maruti Swift, Ford Figo, Chevrolet Beat, Volkswagen Polo, Nissan Micra, Toyota Etios, Hyundai i20 and Tata Indica. All of these models offer both petrol and diesel versions, and are priced around 350,000 rupees to 650,000 rupees.

The launch, expected early next year, of the Nano diesel powered by a sub-1-litre diesel motor could give the diesel market a further big boost. Both Maruti and Hyundai are also planning to launch brand new entry-level models in early 2012, which are likely to get diesel engines in the future.

But now those warning signs. For all these launches to catch consumers’ imagination and cash, diesel needs to remain much cheaper than petrol, at around its current differential of costing 40% less. If the price of diesel fuel goes up, it would adversely impact demand for diesel cars, as cheaper running costs are the main reason why people choose them.

The recently announced hike in petrol prices has only increased the gap. But the government has frequently talked about reducing subsidies on diesel, allowing its price to eventually rise to that of petrol.

Political realities – such as the need to keep diesel cheap for public transport and farm machinery – may prevent this from happening quickly. But if the government’s finances deteriorate – and we are, after all, in the midst of another global economic slowdown – removing the diesel subsidy may become more palatable sooner than expected. Carmakers in general seem to think that the differential in pricing between petrol and diesel will continue at least for the next couple of years. After that? Who knows.

Another possibility is that diesel fuel may be priced differently depending on the type of vehicle in which it is used, with luxury car owners paying more at the pump compared to entry level car owners, or car owners paying more than tractor owners. That would be a politically expedient move for the government (and bad news, perhaps for BMW, Audi, Mercedes and others who have benefitted hugely from the diesel boom.)

Even if the government retains the petrol-to-diesel differential, the uncertainty around it provides possibly the biggest threat to diesel’s halcyon days. The reason: It has made companies reluctant to invest in diesel technology and engines that may be required to meet the heightened demand.

Take Maruti-Suzuki, India’s largest carmaker. Maruti currently makes diesel engines in India under license from Fiat, since Suzuki does not have any diesel engine expertise. Suzuki had entered into an agreement with Volkswagen two years ago, with the aim of obtaining diesel engine technology from the German carmaker. However, recent disputes between the two companies mean that this collaboration is almost at an end. As a result, Maruti is likely to continue its tie-up with Fiat in the future.

Fiat also provides diesel engines to many other manufacturers with the result that, already, there are long waiting lists for diesel cars at dealerships. It’s not unusual for buyers to wait nine months before taking delivery of a diesel model. As demand increases with the launches of all these new diesel cars, those lines would lengthen substantially. The Nano may be the exception here: Tata is developing its own diesel engine for it, a smaller version of the Indica engine.

For now, it makes sense to buy diesel, if you can get your hands on one, given that the differential with petrol will likely remain for a couple of years and the resale value of diesel cars is rising.

But we could easily see a time when, like so many things in India, the demand so far outstrips supply that we end up with frustrated consumers and rapid inflation in the price of diesel cars. And the government may decide that the benefits it is inadvertently giving to the drivers of expensive diesel cars should be curtailed. Neither would be conducive to keeping the diesel boom going for very much longer.

What do you think? Are diesel’s best days already behind us? Let us know in the Comments section.

Darius Lam is an automotive industry analyst and writer based in Mumbai. In the past he has worked with J D Power and Associates in Thailand covering the Indian and Korean auto markets. He has also been the associate editor for industry magazine Autocar Professional in Mumbai.

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